Bitcoin

Considering it is heralded by some people as the future of money, an innovation that will change the world, and even the greatest creation since the internet, we don’t actually hear that much about bitcoin. It was invented by Satoshi Nakamoto, a pseudonymous creator who published a paper in 2008 called “Bitcoin: A Peer-to-Peer Electronic Cash System”, and was seen as a way to transfer money online in the same way that we transfer cash, one-on-one without a middleman.

Although the move away from cash is nothing new, bitcoin takes us away not only from notes and coins, but from sterling, euro and dollars, and the exchange rates and value we associate with them. Most significantly, as a non-centralised, peer-to-peer system, with no banks involved and no borders or external regulations, it has the potential to diminish the monopoly that governments and banks hold over money.

If Bitcoin is confusing, that’s because it’s new; but new and tricky concepts are what we’ve grown accustomed to in technology and the internet. Essentially, it is a new form of money, which although capable of doing what we associate money with, does it in a very different way. It could well be that it eventually changes money for ever – bitcoin becoming to banks what e-mail is to the post-office – but for now, the most interesting thing is not how it works, but how this new currency, still very much in its infancy, grows in the coming years.

If ever required or demanded, bitcoin could, in theory, absorb and hold all the wealth that currently exists in the world.

Bitcoins are created by mining, a process which involves using powerful computers to solve complex maths algorithms which generate a series of unique numbers to form a bitcoin. When the first of these algorithms were discovered, a finite number of 21 million bitcoins was set, and to ensure that no more than this are created, bitcoin blocks are halved in value every four years. The last ‘halving’ took place last week, when the reward value went from 25 to 12.5, meaning that each new block that is mined only produces 12.5 bitcoins. This rule is based on the supply and demand understanding that is at the backbone of all currency and money, and doesn’t change the fact that if ever required or demanded, bitcoin could, in theory, absorb and hold all the wealth that currently exists in the world.

The primary idea for bitcoin is that it is a means to securely and personally transfer money. For many people, this is how bitcoin should remain, and it should not be seen as a direct investment. When the first bitcoin exchange rate was published there were 1,309 bitcoins to the dollar, and at one stage this rose to over a thousand dollars to one bitcoin, meaning were someone to have bought them at their lowest and sold at their highest, they would have made more than one million times their original investment. Despite this however, the temptation to invest in bitcoin should be no greater than the temptation to buy and sell any currency, because bitcoin, like all others, is subject to change.

Bitcoin is perhaps currently most profitable for miners, the people who literally find the bitcoins by solving the complex maths problems. These miners also keep the network secure by approving transfers, and they receive a small reward for their work. The way that this mining is carried out is another sign of the growth of bitcoin. Whereas initial bitcoins could be found on everyday computers, there are now specific mining teams, known as pools, which use specialist technology, set up around the world.

Bitcoin is still in its infancy, and just as google, e-mail, Facebook, pay-pal and online banking have made intricate and complex technology user friendly, by the time bitcoin reaches mainstream use, it will have changed greatly from what it is now.

All of this remains fairly confusing; but it’s probably safe to say that the intricate details of bitcoin, which are really only understood by those who work closely with it, aren’t necessary to understand. There seems little doubt that bitcoin is here to stay, and likely to be very common one day; but just as it is not going away anytime soon, it has also not fully arrived. There is a long way to go before bitcoin, or anything like it, will be considered money as we know it. The creation is still in its infancy, and just as google, e-mail, Facebook, pay-pal and online banking have made intricate and complex technology user friendly, by the time bitcoin reaches mainstream use, it will have changed greatly from what it is now. If and when the time comes that bitcoin has a part to play in our everyday lives, we will come to avail of it casually, knowing how to use it, even if we’re not sure how it works.